The U.S. House Financial Services Committee will hold a hearing today to investigate the main participants in last month’s widely publicized short squeeze of GameStop (GME) stock. Testifying at the hearing will be CEOs and founders of trading app Robinhood, Citadel Securities, Melvin Capital, Reddit — which hosted the forum r/WallStreetBets (WSB) on which the rally was organized — and independent investor Keith Gill, who reportedly initiated the rally through the WSB community forum.
The virtual hearing, which will be live-streamed on the committee’s YouTube channel, is expected to examine possible collusion between Robinhood, Citadel Securities and Melvin Capital in the decision to stop trading of GameStop shares on Robinhood at the height of the rally. All parties have thus far denied this to be the case. Hedge funds, the practice of short selling, and the role of r/WallStreetBets in affecting stock prices are also expected to be addressed in the hearing.
Meanwhile, Treasury Secretary Janet Yellen has met with top financial regulators to discuss the GME price rise and found the industry proved resilient to the price volatility, and recommended the U.S. Securities and Exchange Commission (SEC) release a study of the events. The SEC, which has regulatory authority in this field, is currently awaiting the confirmation of Gary Gensler for chairman, which is expected next week.
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Whatever result comes from the hearings, analysts say the GameStop drama is continuing to accelerate uptake of cryptocurrency and decentralized finance (DeFi) — both of which have recently hit all-time market highs — as retail investors grow disenchanted by the perceived inequalities in traditional finance and look for alternatives.
“This is great for crypto because you’re going to see a movement and a transition of everyday investors where the narrative is; Robinhood acted with ill intent and Wall Street’s rigged,” said Trent Barnes, principal of Zerocap, a Melbourne-based digital assets investments and custodial services firm. “Regardless of whether that’s right or wrong, the people believe it, and sentiment is what matters. So that’s going to drive them towards crypto.”
The tug-of-war over GameStop prices
On March 16 last year, GME was listed at only US$4 per share as institutional investors like Melvin Capital shorted the stocks, expecting the gaming retailer to soon have its “Blockbuster Moment” and go bust. Last month, users on Reddit’s r/WallStreetBets noticed even more GameStop shares were being shorted to suppress the price, and a community of small investors rallied to buy GameStop shares to drive the price up. This short squeeze drove GameStop stock prices to a high of US$483 on Jan. 28 — disastrous for the big hedge fund managers that had placed big bets that the stock would fail.
On the verge of bankruptcy, Melvin Capital received a US$2.75 billion bailout from Citadel LLC and Point72 Asset Management, while trading platforms including Robinhood — which had been the main platform used by WallStreetBets members — halted trading of GameStop stock, and GME prices dropped shortly after. Controversy and accusations of impropriety then erupted as Robinhood had received almost US$100 million in the first quarter of 2020 in payment for order flow fees from Citadel and other institutions.
See related article: GameStop crashes as Ethereum-led crypto rally takes center stage
Both parties denied there was pressure on Robinhood to stop trading, who later clarified the decision was made due to the company not having enough cash to meet its regulatory requirements to continue trading the stock. Ultimately, GameStop shares soon fell to a low of US$53.38 before rebounding slightly, but has continued to track downwards for the past week and is now trading at US$45.94 as of publishing.
“The crypto industry has been in the gaze of the kind of people who been feeling disenfranchised by the experience — or the perception of that experience; it shows them there is an alternative market place for assets which are considered legitimate,” said Jonathan Miller, Australian managing director of Kraken, a crypto exchange. “The GME experience brought those discrepancies of differences between those two worlds.”
For the crypto trading world, the differences include 24-hour, do-it-yourself trading and the ability to maintain custody of assets without a broker. That means not having to go through an entity like Robinhood that could lock a crypto trader out of their alphanumeric wallet.
Meme stocks and crypto
Despite rattling traditional stock traders, the tactics WallStreetBets used to squeeze and drive up the prices of GameStop stock is nothing new to the crypto world.
“It’s almost like crypto had the impact on [WSB],” said Barnes. “If we look at how crypto creates crowd funded communities like this, what’s happening on Wall Street isn’t a new thing. Crypto’s been doing it for years.”
During the 2017-18 initial coin offering (ICO) craze, Barnes says this kind of strategy was common among groups on social media app Telegram, which could have hundreds of thousands of followers. A single moderator of one of these groups would take positions within a low cap point and tell people to pump up the stocks before exiting themselves and moving onto the next one.
“[The moderator would say] ‘Oh, you missed out on that, you’re too late. But this next one’s going to be the next big thing’,” Barnes said. “What WSB has been doing isn’t new, it’s just at scale.”
Driven by an online group, GameStop has been referred to as “meme stock” throughout this surge. Miller, of Kraken, notes particular similarities with Dogecoin (DOGE), which has seen its own price surge more than 1,600% from its starting point this year.
“They (GME and DOGE) have a lot in common [in the] way that interest is circulated on social media,” Miller said. “Social media loves a good meme and Dogecoin was designed intentionally as a meme-coin.”
See related article: GameStop copycat rally pumps up Dogecoin, Ripple XRP and other cryptos
A WallStreetBets copycat Reddit group known as r/SatoshiStreetBets (SSB) led a similar rally for DOGE and Ripple XRP.
XRP prices had been falling after the SEC filed a lawsuit against Ripple alleging fraud. But the copycat rally caused XRP to rise over 270% to US$0.73 on Feb. 1 in two days before crashing to US$0.34 shortly afterwards. Though since then, XRP prices have been making steady gains back towards its December 2020 highs. XRP is now trading at US$0.54 at time of publishing.
Along with XRP, DOGE also rose in the copycat rally — reaching a high of US$0.07 before crashing only US$0.02 only two days later, but since then it has continued to make steady gains and is now trading at US$0.05 at time of publication.
As the GameStop drama’s primary actors are called to the Congressional committee’s stage, off-stage, intense discourse continues over the role of hedge funds, the practice of shorting stocks and the role of community forums on Wall Street.
Institutional investors have called for increased regulation, while many others — including politicians on both sides — expressed solidarity with the WallStreetBets community, glad to see “the little guy” manage to make a profit in the face of professional traders.
This attitude is also being fueled by deep-seated frustration at large banks, hedge funds and the rest of the traditional financial system since the 2008 Global Financial Crisis, amid perceptions that little progress has been made to amend underlying structural problems in the sector.
“We have a system where we have socialized the losses of very large financial institutions,” said Arry Yu, chair of the Cascadia Blockchain Council, a group dedicated to promoting blockchain businesses in Oregon, Washington State and British Columbia. “Taxpayers are bailing out these large institutions, that’s what happened in 2008 and still continues today, but we’re privatizing their profits. So, those that have stock — which is a very select few — are making all the money.”
The concurrence of this frustration as crypto and DeFi enter the mainstream could serve to accelerate adoption of these technologies among consumers looking for alternatives, Yu said.
“When it comes to crypto, it’s ‘I have to opt out of the system, I have to find something better,’” Yu said. “Hopefully it’s in the direction of bitcoin or DeFi products, which is all about taking power away from the insider class that’s making all the profits and giving more financial products to the underdog, to the people.”